Basis-momentum

82 Pages Posted: 2 Apr 2015 Last revised: 12 Dec 2017

See all articles by Martijn Boons

Martijn Boons

Tilburg University

Melissa Porras Prado

Nova School of Business and Economics; Centre for Economic Policy Research (CEPR)

Date Written: April 24, 2015

Abstract

We introduce a return predictor related to the slope and curvature of the futures term structure: basis-momentum. Basis-momentum strongly outperforms benchmark characteristics in predicting commodity spot and term premiums in the time series and cross section. Exposure to basis-momentum is priced among commodity-sorted portfolios and individual commodities. We argue that basis-momentum captures imbalances in the supply and demand of futures contracts that materialize when the market-clearing ability of speculators and intermediaries is impaired, and that basis-momentum represents compensation for priced risk. Our findings are inconsistent with alternative explanations based on storage, inventory, and hedging pressure.

Keywords: Basis-momentum, term structure of commodity futures returns, maturity-specific price pressure, commodity factor pricing model, volatility risk

JEL Classification: G12, G13

Suggested Citation

Boons, Martijn and Porras Prado, Melissa, Basis-momentum (April 24, 2015). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2587784 or http://dx.doi.org/10.2139/ssrn.2587784

Martijn Boons (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Melissa Porras Prado

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda 1
Carcavelos, 2775-405
Portugal

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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